The Tesla Model 3 arrives this week — here are the risks

Tesla is expected to launch its long-awaited $35,000 Model 3 sedan on Friday and deliver the first 30 to employees at the electric-car maker's factory in Fremont, California.

The arrival of a new four-door would ordinarily be a ho-hum event in the auto industry. But the Model 3 is anything but — it's Tesla bid to quintuple sales by 2018 and take them to 1 million by 2020. (Last year, the carmaker didn't even deliver 100,000 cars.)

The Model 3 is also key to vindicating Tesla's market cap of about $50 billion, larger than those of Fiat Chrysler Automobiles, Ford, and, at one time in 2017, General Motors. Since its 2010 initial public offering, Tesla has turned two profitable quarters. The Detroit automakers, meanwhile, have posted steady profits for years and spent the past two raking in cash amid a sales boom in the US powered by SUVs and pickup trucks.

So the Model 3 is a huge deal. And as with any huge deal, there are risks.

Building the car

Tesla's factory. Benjamin Zhang/Business Insider

Tesla has been superb at crafting a high-tech, futuristic story, born of Silicon Valley values and served up by the charismatic CEO Elon Musk, a 21st-century hybrid of Walt Disney, Henry Ford, Steve Jobs, and Howard Hughes (with some Preston Tucker thrown in).

The story has propelled the stock to epic levels.

The more mundane aspects of building cars have been another matter. Both the Model S and Model X were delayed and endured a lot of production problems. Tesla has been around for 13 years, yet the company continues to struggle with fundamentals.

The company could have more than 500,000 preorders for the Model 3. Any other major automaker would have seen that number and kicked a factory into gear, rolling out cars in short order to bring in the cash. GM in 2015 debuted a long-range electric vehicle, priced about the same as the Model 3, and it was sending vehicles to dealerships by late 2016.

The pressure is now on for Tesla, a carmaker that has never wanted to be like anybody else, to hit its marks in this critical, old-school area.

Making money on it

An earlier look at Model 3. YouTube/Motor Trend

Tesla started by selling $100,000 cars to a well-heeled elite. Even though the Model 3 may be priced closer to $50,000 than $35,000 once it's optioned up, Tesla is still moving in the opposite direction of fat profits. Smaller cars — and mass-market vehicles — make less money than luxury ones.

There's an argument that Tesla makes a healthy margin in the Model S and Model X, but because the company nearly always loses money, that margin is academic at this point. And the Model 3, with its production, engineering, and launch demands, could gobble up much of Tesla's current cash and future operating profits.

So it's vital the vehicle eventually achieves both profitability and volume.

Avoiding a major recall

Tesla has been hit by some notable recalls over the years, but so few of its vehicles are on the road that it hasn't made a huge difference.

Recalls are routine in the car business, but any Tesla recall garners outsize attention. The company has set itself up for a Model 3 recall by skipping a production prototyping stage, which validates the assembly line and ensures production will be smooth and efficient, and going directly to mass production.

The cars could appear in significant numbers by mid-2018 if Tesla's ambitious production ramp is a success. But because of the rush, the recall watch will be on from the get-go.

Bucking a market trend

The Chevy Bolt. Hollis Johnson

Nobody else in the car business is launching a new sedan. The market in the US has shifted to SUVs and crossovers, so automakers are furiously expanding that aspect of their offerings.

As with the Model S, a four-door that came out before the Model X SUV, Tesla is launching the Model 3 sedan ahead of the Model Y crossover, a vehicle that might not show up until 2020 or later.

Tesla's preorders suggest there's plenty of demand for the Model 3 — but the risk there is that we could be talking about Tesla demand, rather than vehicle demand.

Staying ahead of the competition

The Porsche Mission E. Porsche

Following on that point, Tesla has thus far enjoyed a great deal of Tesla demand — people want its cars because they want to be part of its story.

But Tesla has also had the all-electric market pretty much to itself. For 13 years. And it hasn't been able to make money, as EVs amount to only about 1% of global sales. The bigger carmakers have been happy to let Tesla take on all the risk, only now are they starting to bring out competitive vehicles, and as GM demonstrated with the Bolt, they can roll out such a car in short order.

Musk is happy about this — he never wanted to go it alone, and he's playing a long game called "save the planet." But the era of Tesla watching is now over; the era of Tesla beating has begun.

Sustaining the momentum

The Model X. Tesla

As exciting as the Model 3 arrival is, it's only Tesla's third car. If you want to buy a Tesla, you don't suffer from an abundance of choice, and the expected debut in September of a semitruck design isn't likely to help. Tesla somewhat solves this problem by offering different battery configurations, rear-wheel and all-wheel-drive variants, and juicier levels of performance.

But segmentation is a challenge. A Ford, GM, Toyota, or Honda will sell you one of a half-dozen crossovers, from diminutive to quite large, with lengthy options lists and varying levels of luxury, from bare bones to high-end.

So Tesla needs to add to the Model 3 lineup, and fast. Tesla also needs to avoid relying on refreshing aging platforms. The Model S is getting long in the tooth, and while over-the-air software updates might add capabilities, a redesigned vehicle has to come someday. That day will also come for the Model X and the Model 3.

All eyes will be on Tesla this week as the Model 3 gets real. But when it comes to the risks, the real work has just begun.